BEFORE YOU DO, you should know the definition:
An owner carry-back is when a seller takes a portion of their equity in the form of a second trust deed, deferring payment of that equity until a later date and collecting interest payments from the buyer.
After speaking with various mortgage brokers in Orange County; it has been mentioned that there are INCREASING amounts of OWNER FINANCING/CARRYBACK loans on homes offered for sale. Since the financial institutions have halted 2nd Trust Deeds for the most part; some SELLERS are stepping up to help sell their homes.
The guidelines for owner carry-backs are pretty simple.
FHA: First, they are not allowed on new FHA financing; however a seller with an existing FHA loan may sell to a buyer who assumes the existing FHA mortgage and the seller may carry back a portion of the remaining equity.
Conventional: Fannie Mae and Freddie Mac allow seller carry-back financing as part of a purchase transaction. The maximum combined loan to value can be up to 95% depending on FICO score, but many lenders put on an overlay reducing the maximum to 90%. The maximum first trust deed, or primary mortgage, from the lender cannot exceed 80% loan to value. So the typical transaction is 10% down, 10% seller carry-back and an 80% new primary mortgage.
The terms on the note to the seller must have a minimum monthly payment of interest only. The interest rate must be “consistent with the market”, i.e. no zero interest notes. The loan term must be for at least five years, if shorter the buyer must demonstrate ability to pay off the loan as part of the approval. For example if a seller carries back a $50,000 for three years, the buyer must show they will have at least $50,000 in liquid assets after the close of escrow. The note must be recorded through escrow as part of the transaction.
Benefits: To the buyer the benefit of an owner carry-back is the opportunity to avoid mortgage insurance without putting 20% down. Or if the buyer is anticipating a large amount of cash in the near future, perhaps the closing of another property, settlement of an estate, annual bonus, the buyer can pay off the note early and have a smaller remaining primary loan.
To the seller the benefits are supplemental income from the interest payment and/or securing a buyer for their property in a difficult market.
Risks: The biggest risk to the buyer is the balloon payment that is typical with seller carry-backs. Will you have the funds or ability to pay off the note when due in 5 years?
If you have any questions on this option, please call me: (949) 922-2200
Your thoughts and feedback on this topic are greatly appreciated. Please feel free to post your comments.
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